Stimulus and property sales keep China growing

MarkMagnier

BEIJING--Two gauges of Chinese factory output suggest that ongoing fiscal stimulus and rising real-estate sales propped up economic expansion in November, though more of the benefit is flowing to state companies.

China's official manufacturing purchasing managers index rose to 51.7 last month from October's 51.2, the National Bureau of Statistics said Thursday. The index has remained above the 50 mark separating expansion from contraction for four straight months. The November reading beat a median forecast of 51.0 by 10 economists polled by The Wall Street Journal.

A competing gauge, the private Caixin PMI, fell to 50.9 in November from 51.2 in October, which was a 27-month high. Economists say the official data tends to better reflect conditions at large state-owned companies while the Caixin measure tends to track smaller, private firms.

China's official nonmanufacturing PMI, also released Thursday, rose to 54.7 in November from 54.0 in October.

The official PMI surprised on the upside, said OCBC Bank economist Dongming Xie. "Whether on the supply side or the demand side, we're seeing a return of confidence in the economy."

After a rocky start to the year, business sentiment has improved in China on the heels of easy-money policies and stepped-up stimulus. Demand in November was steady as private investment, though still weak, has picked up and output expanded.

Companies on the economy's front line welcomed the stability. Runlin Environmental Protection Technology Co., a maker of plastic tubes based in Zaoqiang, in northern China's Hebei province, said business has improved this year on reduced economic volatility and cheaper resin, its principal raw material, on the back of lower oil prices earlier in the year.

"We've been able to hold our selling price," said Tong Fei, a company administrative worker. "That's allowed us to make more profits this year."

But easy-money policies that put a floor under the economy are likely to worsen China's longer-term problems, including widespread industrial capacity and rising corporate debt, economists said. "The key question is whether the recovery is sustainable or not," Mr. Xie said. "Corporate debt and overcapacity are not a one-day story that just go away."

Rising global commodity prices in recent months have helped to end four years of deflation in Chinese factory prices. But these are also likely to squeeze manufacturing profits in coming months as higher input costs move through the supply chain, economists warned.

A major contributor to China's recent economic stability has been real-estate sales. While these decelerated after the government imposed purchase restrictions in large cities to dampen speculation, they remain supportive. Real-estate sales in China's top 70 cities sales grew 1.1% month on month in October, down from September's 1.8%. In other areas of the traditional economy, freight volumes grew by more than 10% year on year in October while power consumption increased at around half that pace in the first 10 months of 2016.

Stimulus has also helped. In the latest of several such announcements, China this week approved a 247 billion yuan ($35.8 billion) railway project aimed at bolstering connections between Beijing, the port city of Tianjin and the neighboring province of Hebei. China's total fixed-asset investment in railways increased 9.8% year on year to 623 billion yuan during the first 10 months of 2016.

Sluggish external demand and Beijing's efforts to cut excess industrial capacity will continue weighing on growth, which will likely lead to more fiscal stimulus, said Bank of Communications Ltd. economist Liu Xuezhi.

Economists said they expect China to maintain its growth pace in the fourth quarter and for the year at about 6.7%, although this would be the slowest pace in a quarter century for the second year in a row.

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